Permanent Life Insurance products last a lifetime, unlike term Insurance which has an expiration date. We will discuss all you need to know about Permanent or Whole Life Insurance and how to understand the different types.
There are several types of Permanent Life Insurance to choose from depending on the needs of the client. As you continue to read you will learn all you need to know about Permanent Life Insurance and which product might be best for you.
Permanent Life Insurance products are far more expensive than term insurance, making it unaffordable for most Americans. Some financial professionals recommend buying term and invest the difference. However, those that buy term insurance do so because they need money to meet other financial obligations. They do not have enough money to invest the difference.
Permanent Life Insurance products are best for those that can afford it. This means with the cost of permanent insurance, you comfortably have enough to meet your living expenses, have an emergency fund, and still have enough money left over at the end of the month.
ALL YOU NEED TO KNOW ABOUT PERMANENT LIFE INSURANCE AND HOW TO UNDERSTAND THE DIFFERENT TYPES:
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GUARANTEED ISSUE
It is designed for people that might not otherwise qualify for health insurance. You do not have to undergo a medical exam or answer any health or prescription questions. If the insured dies within 2 to 3 years, then the insurance will not pay.
It is usually written for people between the ages of 50 - 80 years old, the policy is anywhere between $2,000 and $25,000, and used to pay for final expenses.
This is best for someone who is sick and not expecting to live long. It is bought with the purpose of relieving the financial burden of burial costs. If the insured dies before 2 or 3 years, the policy will not pay out and the premiums are paid back to the beneficiaries with interest.
A good agent will get as much medical information as possible and research all the companies, to see how many subpar policies were written by different companies, who they most often would accept and other factors, before sending in an application. Agents should find a company that is most likely to approve the potential client before sending the application. Not send multiple applications to see who will accept.
The easiest way to get life insurance is through a group plan with the company you work for.
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INDEXED
Insurance premiums are higher for this type of insurance. You will pay a level premium with a set monthly payment that does not fluctuate. You will earn Interest and the rate is determined through an index such as the Standard and Poor’s (S&P).
Someone that is less risk adverse and wants to use their insurance policy as an investment might want this type of insurance policy. It is recommended that anyone interested in this type of policy should speak to a life insurance agent. This policy is not suitable for most. -
INDEXED UNIVERSAL
This insurance also offers cash value growth. The insurance company has a baseline that is based on an index. The premiums and death benefits are also adjustable.
This life insurance should be discussed thoroughly with an agent of both the pros and cons. It hasn’t been a policy I have recommended for my clients. However, time has proven that insurance companies do change policies to make them more beneficial. Maybe this will change in the future.
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JOINT LIFE INSURANCE
Joint Life Insurance covers two people. Usually, a married couple when one spouse doesn’t qualify for life insurance. It is used to ensure that dependents are taken care of. They can be written as the first to die or second to die. Joint Life Insurance are also known as a survivorship policy.
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LIMITED PAYMENT
Allows you to prepay the entire cost of a whole life insurance policy for a certain number of years rather than over your lifetime. Most of the time these premiums are paid within 10 or 20 years.
You can also choose how often you pay the premiums: monthly, quarterly, semiannually, or annually. The policy’s cash value cannot be used to pay for the premiums. Some qualified IRA’s or other retirement accounts can use the money to fund Limited Payment Whole Life Insurance.
This insurance is good for those that want a retirement income from either the policy’s cash value or dividend payment.
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MODIFIED
Has a low initial premium that increases over time. People that choose this type of policy do so with the belief that their income will continue to increase over time. For most people they should avoid this policy. There is no guarantee of what you will be earning in the future.
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NON-PARTICIPATING VS. PARTICIPATING
Some insurance companies allow their policyholders to share in the profits of the insurance company.
These policyholders get paid either through dividends or bonuses and are usually paid annually. This is known as a participating Whole Life Insurance policy.
If you are a participating whole Life Insurance policyholder, you can receive payments by:
- A payout made by the insurer.
- depositing the dividends or bonuses with the insurer and earn interest.
- Use the payments to pay towards your insurance premium.
The non-participating does not participate in the insurance company’s profits and does not earn any bonuses or dividends. However, they do pay out the benefits upon maturity.
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REDUCED PAID-UP
If you own a Whole Life Insurance policy and you can no longer afford to pay your premiums, you can either surrender the policy and receive the cash value or use the cash value to pay up any future premiums.If you use the cash value to pay future premiums, then the insurance benefit is reduced by the amount of cash value.
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SIMPLIFIED ISSUE
Is used as a final expense coverage of up to 40 or 50 thousand depending on the insurer. If you cannot qualify for traditional insurance, Simplified Issue Whole Life can provide a certain amount of coverage.
A medical exam is not required, but you will have to answer detailed medical questions unlike the Guaranteed Life Insurance. Also, age and other restrictions can disqualify you from a Simplified Issue Whole Life Insurance whereas Guaranteed Life has no such restrictions.
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SINGLE-PREMIUM
It is exactly how it sounds. You pay a single premium in one lump sum. No monthly premiums. When the policyholder dies the benefits get paid out to the beneficiaries.
The downside is that the policy becomes a Modified Endowment Contract (MEC). This means that it can come with tax implications when withdrawn and you cannot make additional contributions to the policy.
It isn’t good if you die soon after the purchase of the policy. Single-Premium Whole Life Insurance has surrender charges for the first few years. They also have the same early withdrawal penalties as a retirement account (10% before 59 ½)
These policies are good for special needs trusts to provide for dependents or when beneficiaries might be faced with an estate tax.
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UNIVERSAL
Universal Whole Life Insurance is also known as Adjustable Life Insurance because it offers a flexible premium payment. This allows the insured to increase or decrease the death or savings benefits.
You can control how much and when you pay once there is money in the account. Depending on the Insurer certain limits will apply.
When the premium is paid, part of it goes into an investment account earning tax deferred interest. This allows your cash value to increase. If there is enough cash value in the account, you can use the cash value to pay the premiums.
The flexibility makes Universal Life attractive because you can adjust payments and death benefits if your life circumstances change. This makes it less expensive, and you can borrow against it.
A potential downside is the interest rates can decrease depending on the economy. Another downside is the possibility of surrender charges. This means if you terminate your policy, then there may be fees for the termination of the policy.
The policy needs to be actively monitored to make sure there is always enough funds to not trigger fees or termination of the policy.
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VARIABLE
Variable Whole Life Insurance is a permanent insurance with a cash value. It is attached to the investment market that offers investment options known as sub accounts.
Variable Life insurance can increase in value or decrease in value depending on the market. This policy must have a prospectus attached describing all fees including all sub account expenses and other charges.
Because this insurance is tied to the market it is considered a security.
If you find that you still have questions after reading about all you need to know about Permanent Life Insurance, please do not hesitate to contact us.